China’s laws, regulations, and policies with regard to foreign investment and trade include numerous provisions and mandates for foreign technology transfer. These policies are clearly intended to support domestic reform and modernization efforts toward self-sufficiency in high-tech sectors. Furthermore, many of the provisions included in China's existing industrial policies appear to raise questions as to their consistency with international trade practices and bilateral agreements... Despite these policies, however, many foreign corporations continue to invest in China, including US high-tech companies. In doing so, these companies often must transfer commercial technology in various forms in order to accommodate Chinese foreign investment and import regulations, which have become increasingly selective in terms of the level and type of technologies allowed. Thus, it is clear that foreign firms are being coerced into transferring technology (which they probably would not otherwise do) as the price to be paid for access to China's market.

The more difficult question to answer, however, is the degree to which these transfers are "forced" [as the] degree to which US technology is being transferred to China is a combination of Chinese law and strategic decision-making on the part of US corporations. That is, technology transfer is both mandated in Chinese regulations or industrial policies (with which US companies wishing to invest in China must comply) and used as a deal-maker by US firms seeking joint venture contracts in China…

[F]oreign investors face a difficult dilemma: to invest early and accept the risks involved in doing so in hopes of minimizing potential losses while creating a market presence and goodwill in China, or to wait and see how China's market and policies develop, investing when the time is ripe and investment policies less discriminatory. The leading high-tech companies — American, European, and increasingly also the Japanese — seem to have decided on the former strategy…

[Part 1 shows that] China’s foreign investment policies have followed a clear pattern characterized by an increasingly targeted focus on hightechnology investment and imports. These policies are intended to bolster China’s modernization efforts in both the civilian and military sectors. The most significant finding of this study, however, is the degree to which US high-tech firms are collaborating on R&D with leading Chinese universities and research institutions in China, an offset agreement frequently accompanying joint venture contracts. Although there is as yet no clear cause and effect as much of the evidence is circumstantial, Part 2 of the study demonstrates that trends in Sino-US trade are worrisome in that hightechnology sector exports (such as electronics) are increasing from China to the United States and elsewhere while at the same time the US trade deficit with China is climbing.

Long past the period of sending "outdated factory equipment to China to produce older models no longer salable in the West, the 2006 landscape shows a continuing foreign competition in China:

so fierce [that] Honda is about to introduce its latest version of the Civic only several months after it went on sale in Europe, Japan and the United States. Toyota, meanwhile, is assembling its Prius gasoline-electric sedan only in Japan and China. [In 2005-6] Ford opened a second production line next door that is practically identical to one of its most advanced factories, the Saarlouis operation in southwestern Germany. The new line produces the Focus, the same small car it builds in Germany (but different from the Focus sold in the United States). And with continuing improvements to the first line, it will bring total capacity here to 200,000 cars a year by June [2006]…

American and European carmakers, including Ford, General Motors, DaimlerChrysler and Volkswagen, as well as Toyota, Honda and Nissan of Japan are introducing their best technology to their plants in China, and not only to compete against one another. They also face rapidly growing competition in the Chinese market from purely local companies like Geely, Chery and Lifan.

That technology infusion is now reversing the acquisition direction. Shanghai Automotive Industry Corporation (SAIC) "acquired a controlling stake in Korean car maker Ssangyong Motor Co." in 2004. Nanjing Automobile Corporation bested SAIC to acquire the UK's MG Rover Group in 2005, dismantling its factories for shipment to China (although SAIC gained rights to two Rover designs). Chinese suppliers such as Wanxiang continue to acquire automotive suppliers, many of whom "needed cash because Chinese manufacturers like Wanxiang were eroding their business." To solve its shortfall in efficient engine manufacture, the Lifan Group in partnership with the CCP is attempting to purchase the highly advanced Chrysler-BMW joint venture Campo Largo engine plant, which if successful, would see the plant dismantled and moved to China to seed indigenous engine manufacture. [Russian AvtoVAZ and GAZ has also evinced interest.]

SAIC is now using expertise gained from its joint ventures with GM and Volkswagen to produce its own upscale luxury sedans in 2006, occupying both partner and competitor roles to its foreign partners. Foreign OEMs have no avenue of redress:

Under Chinese regulations, to make cars in China, foreign companies must form joint ventures in which their Chinese partners own no less than 50%. The major multinationals have already teamed up with the biggest and most promising local firms. [They] have little choice but to keep making their cars and encourage their partners not to compete too directly with them.

GM and Volkswagen have no choice but to acquiesce even though they know that all the IP they contributed, and will contribute, to their joint ventures will increasingly be used against them:

In a prepared statement, GM said it "understands" Shanghai Automotive's "desire for further growth" and that it is confident "SAIC recognizes that the success of both companies in the China market is closely linked to the success of our joint ventures."

In a prepared statement, Volkswagen said, "Volkswagen and SAIC keep a close and long-lasting partnership. We understand SAIC's wish to build up an own Chinese car brand. We offered our support in the past and still do at present."

While foreign OEMs have enjoyed rapidly rising production of "family vehicles" (cars, SUVs and minivans) in China in the 2000-2005 period, indigenous Chinese manufacture has grown at much higher rate. (It is an axiom of technology maturation that each generation takes half the time of its predecessor; Japanese car manufacturers took 20 years to establish themselves in the US market, the Koreans 10 years, and short of import limitations, I expect the Chinese to half that, all at lower cost.)

SAIC's vertical integration will drive other Chinese auto firms to follow suit, thereby increasing the pressure and demands on foreign OEMs for more and better technology even as it narrows their options. Foreign OEMs will become collateral damage in the competition between Chinese OEMs and Tier One suppliers.

I predict that Chinese firms will move instead to replace foreign firms or absorb their Chinese operations when the foreign OEMs have nothing else to offer, ultimately buying into increasingly ailing foreign OEMs so as to create sales channels for Chinese vehicles.

What happens when even the current level of JV supplied technology is no longer sufficient, when the desired technology is not within the hands of foreign OEMs?